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Back to 2008 as Zimdollar returns

by Bloomberg
29 Jun 2019 at 16:47hrs | Views
FOR President Emmerson Mnangagwa's government, the re-introduction of the national currency a decade after its demise is a return to "normalcy".

For most of the country's citizens, it's a bitter reminder of years of hyperinflation, which destroyed their savings and left them bartering for daily basics.

"Remember 2008, when you needed trillions of dollars to buy bread? In Zimbabwe, time goes backwards," said Edwin Mapondera (34), who sells wooden sculptures in one of Harare's affluent northern suburbs.

"I'm taking any currency. People have not listened to this nonsense because now, the famous Zimbabwe dollar is going to become worthless in no time."

The Reserve Bank of Zimbabwe said on Monday that starting immediately, currencies such as the United States dollar and South African rand would no longer be legal tender. Instead, a
quasi-currency known as bond notes, which can't be traded outside the country, and their electronic equivalent, the RTGS dollar, will be termed the Zimbabwe dollar.

By re-introducing it, the government is taking a risk, as more people may be driven into the black market, further starving the economy of already insufficient State revenue. That could leave the State struggling to pay government workers, who account for about 90% of its budget, and with little money to shore up creaking infrastructure.

Effects still linger from the last time the Zimbabwe dollar crashed and burned, transforming one of Africa's most developed nations into a place where gasoline and bread were periodically unavailable, with almost everyone unemployed, while about a quarter of the population emigrated.

Just two blocks from the country's premier Meikles Hotel, what was once a neat and active bus terminus is overrun by hundreds of vendors, selling everything from vegetables to spanners.

The 2008 catastrophe began after then President Robert Mugabe backed the seizure of white-owned commercial farms around the turn of the century. The farms' new owners failed to produce, exports plummeted and the national currency rapidly lost its value. Then the central bank turned on the printing press in a bid to meet the government's running costs.

Within eight years, inflation had reached 500 billion percent and the largest bank note was 100 trillion Zimbabwe dollars. Foreign currencies became legal tender in 2009. That initially stabilised the economy, but the strength of the dollar also made Zimbabwean manufacturing companies uncompetitive against those of their lower-cost South African rivals.

In November 2017, Mugabe was ousted and replaced by Emmerson Mnangagwa. The new President made a pledge that Zimbabwe would be "open for business", but failed to address currency shortages and stagflation. The resulting lack of investment and scarce hard currency left people lining up outside banks, nor can the government pay for essential imports such as gasoline and wheat.

In February, under the urging of Finance minister Mthuli Ncube, the central bank did away with the insistence that bond notes and the RTGS$ were on par with the US currency and instead created an interbank market. Despite this week's announcement, the RTGS$ has continued its decline. It traded at 13,50 to the dollar on Tuesday, according to data compiled by Bloomberg, bringing its fall this quarter to 69%.

"The market was self-US dollarising," Ncube, an economist who has lectured at the University of Oxford, said in a video posted on Twitter. "It was uncontrollable and we felt that we needed to bring the situation under control."

Ordinary Zimbabweans have seen at least three rounds of fuel price hikes this year, and the cost of other goods such as bread and beer have risen markedly. Inflation, officially at almost 100%, is much higher if black-market rates are used.

"This is going to cause widespread panic among a highly sensitive consumer base, which could provoke social unrest," Jee-A van der Linde, an analyst at NKC African Economics in Paarl, South Africa, said in a note to clients. "The country simply does not have the foreign reserves required to back its own currency. Moreover, there is nothing that stands in the way of the RBZ to create more money."

That sentiment is echoed by Zimbabwe's business sector.

The central bank must "exercise restraint and prudence with the printing machine," the Confederation of Zimbabwean Retailers president Denford Mutashu said. The Chamber of Mines of Zimbabwe said its members want to know if they will still be paid for their gold in forex they need dearly to pay for essential imports.

But the government's biggest challenge may be avoiding a repeat of the unrest it saw in January when streets protests, led by labour unions, erupted after the fuel price was more than doubled overnight. At least 17 people died in the ensuing crackdown by security forces.

This decision "destroys whatever little confidence that was left", said Peter Mutasa, president of the Zimbabwe Congress of Trade Unions. "As workers, we reserve the right to do whatever is right for us, and we will decide the way forward on how best we should proceed."


Source - Bloomberg

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